WASHINGTON – Renters are on track to get some relief in 2023, as a growing number of indicators suggest the red-hot rental market has begun to cool, a change that could also help reduce decades-high inflation that has been raising interest rates.
Rising rental costs have been one of the biggest drivers of inflation over the past two years after year-over-year rent increases. peaked at 17% last Januaryaccording to data from Realtor.com. But economists and industry analysts expect a significant slowdown this year fueled by a wave of new apartment construction and more renters staying amid economic uncertainty.
That change is good news not just for renters, but for the economy as a whole. A slowdown in rent increases could help ease inflation, as housing costs account for a third of the consumer price index, which is one of the metrics the Federal Reserve uses to gauge whether to continue raising rates. of interest. Those higher interest rates have made it more expensive for consumers to borrow money for major purchases, like a car or a house, and for businesses that need to borrow money to expand.
“The balance of power in the rental market has really shifted to tenants very quickly,” said Jay Parsons, chief economist at real estate technology firm RealPage. “We’ve seen rental growth really slow down. We now have four straight months where new leases month after month have gone down. The market has really changed substantially.”
In the last months of 2022, online real estate firms Zillow, red fin Y List of apartments registered significant drops in rental sales prices.
The cooling of the rental market still doesn’t show up in the federal inflation data because those numbers reflect what renters are paying on their existing leases rather than what landlords are currently charging new tenants, leading to a lag of approximately 12 months in the federal data. researchers have found. The Consumer Price Index, for example, showed a 0.8% increase in the amount consumers paid for rent from November to December, while Zillow found a 0.3% drop in asking prices during the month. same period.
But as renters enter new leases with smaller increases or find a better deal on another property, the slowdown will start to show up in federal data as early as this spring, said Jeff Tucker, a senior economist at Zillow.
“We saw year-over-year growth at our rental rate peak last February, and it’s been slowing ever since,” Tucker said. “We have had month-over-month declines in our rental index in recent months, so it is a promising outlook that the CPI rental measures are likely to reverse direction sometime this spring and start to slow down.”
Even before falling rents are factored in, inflation has shown signs of improving, helped in large part by a drop in gasoline prices. The Consumer Price Index fell 0.1% in December compared to the previous month, the biggest monthly drop since the start of the pandemic. Prices are still up 6.5% from a year earlier, though that’s down from 9% in June.
Helping rents fall is an overall slowdown in how often people move compared to the pandemic-induced turnover seen over the past two years. U-Haul saw one-way movements it will decline in 2022 from the record numbers it saw in 2021 and 2020, according to a company spokesperson. That trend is expected to continue into 2023, as more people are expected to stay amid economic uncertainty and fears of a recession.
“It takes some confidence in yourself, in the economy and in your job to go and sign a 12-month lease or buy a house,” Tucker said. “These big commitments are a bit of a vote of confidence in how things are going to go over the next 12 months and a lot of data shows that people were not feeling as confident in the final months of 2022.”
Rents have also varied widely by geography, with some of the most popular markets experiencing the sharpest slowdowns, while the most affordable markets were some of the few places where rents increased. In December, rents fell 0.9% in Las Vegas and 0.8% in Dallas, while Cleveland, Pittsburgh and Charlotte, North Carolina, were among a handful of cities that saw rents rise last month. . according to Zillow.
Also driving down rents is a wave of new apartment buildings that have been opening for the past year. In 2021 and 2022, more than 800,000 new apartments came on the market with apartment building construction at its highest levels in 50 years.
But not all renters will feel the same level of relief from the construction boom. Given the high cost of new construction, the vast majority of new buildings coming on the market will be for the wealthiest tenants. That will mean more competition among luxury buildings with landlords offering incentives like a free month’s rent or hundreds of dollars worth of gift cards.
However, competition is not expected to trickle down to the lower or mid-end of the market anytime soon, and the high cost of construction has made it prohibitively expensive for developers to build more affordable rental buildings unless they receive local subsidies. or federal, which have remained limited, real estate economists said.
“It’s really challenging for developers to build given the high cost of land, labor, materials and everything else to build affordable housing without these subsidy programs,” Parsons said. “So while we’re looking at 40-year highs in construction, the vast majority are luxury rental properties that will lease to six-figure income households. Unfortunately, we are not meeting that demand at the lower end of the market.”
